ELECTRO RENT 2009 ANNUAL REPORT     5MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSTHE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ INCONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE OTHERFINANCIAL AND STATISTICAL INFORMATION APPEARING ELSEWHERE IN THIS ANNUAL REPORT.**OVERVIEW >**We are one of the largest global organizations devoted to the rental, lease and sale of electronicequipment, primarily test and measurement (“T&M”) and personal computer-related data products(“DP”) equipment, with operations based in North America, Europe and China. In fiscal 2009, 79% ofour rental and lease revenues were derived from T&M equipment. Although this percentage hasincreased slightly from fiscal 2008, both our T&M and DP rental and lease revenues have declined.Our T&M and DP rental activity and rental rates decreased in fiscal 2009 compared to fiscal 2008,reflecting competitive pressures and the recession in the United States and the internationalmarkets that we serve.In fiscal 2009, rental revenues were 85% of our rental and lease revenue. That percentage hasincreased over fiscal 2008 due to an increase in T&M rental activity in our European operations,while lease revenues have declined.A significant part of our T&M equipment portfolio is rented or leased to large companies in theaerospace and defense, telecommunications, semiconductor and electronics industries. We believethat a large part of our T&M equipment is used in research and development activities. We also rentequipment to companies of various sizes representing a cross-section of the economy. Our businessis relatively non-seasonal except for the third quarter months of December, January and February,when rental activity declines due to extended holiday closings by a number of customers. Inaddition, rental billing is reduced during February because it is a short month.We sell used equipment in the normal course of business based on customer requirements. Our sale ofused equipment allows us to maintain our inventory with equipment that meets current technologicalstandards and customer demand. In addition, we are party to distribution agreements with threeleading manufacturers to sell basic T&M equipment to current and prospective customers through ourdistribution channel.The profitability of our business depends in part on controlling the timing, pricing and mix ofpurchases and sales of equipment. We seek to acquire new and used equipment at attractive pricesfor the purpose of deriving a profit from a combination of renting and/or selling such equipment.The sale of equipment, either after acquisition or after it has been rented, can provide asignificant portion of our revenues and operating profit. To maximize our overall profit from therental, leasing, and sales of equipment, we manage our equipment pool on an on-going basis byanalyzing our product strategy for each specific equipment class in light of that equipment’shistorical and projected life cycle. In doing so, we must compare our estimate of potential profitfrom rental with the potential profit from the product’s immediate sale and replacement with new orother equipment. In our analysis, we assume depreciation and impairment of equipment based onprojected performance and historical levels, although historical trends are not necessarilyindicative of future trends. Our overall equipment management is complex, and our product strategycan change during a product’s lifetime based upon numerous factors, including the U.S. and globaleconomy, interest rates and new product launches. Our strategic equipment decisions are generallybased on the following fundamentals:n OUR ACQUISITION COST; n OUR ESTIMATES OF CURRENT AND FUTURE MARKET DEMAND FOR RENTALS; n OUR ESTIMATES OF CURRENT AND FUTURE SUPPLY OF PRODUCT; n THE BOOK VALUE OF THE PRODUCT AFTER DEPRECIATION AND OTHER IMPAIRMENT; n OUR ESTIMATES OF THE EFFECT OF INTEREST RATES ON RENTAL AND LEASING FEES AS WELL AS CAPITALFINANCING; AND n OUR ESTIMATES OF THE POTENTIAL CURRENT AND FUTURE SALE PRICES.
 

 
6       ELECTRO RENT 2009 ANNUAL REPORTIf we do not accurately predict market trends, or if demand for the equipment we supply declines,we can be left with inventory that we are unable to rent or sell for a profit. We assess thecarrying value of the equipment pool on a quarterly basis or more frequently when factorsindicating impairment are present.Our financial results for fiscal 2009 were impacted by competitive pressure on rental rates andlower utilization rates due in large part to the recession in the U.S. and our major internationalmarkets. The recession in the U.S. and global economy, resulting in more stringent creditrequirements and reduced access to capital, is adversely affecting our customers and competitors.Consequently, while we continue to work at initiatives to expand revenue, we must also focus onremaining profitable in the current conditions, as well as being prepared for the possibility thatthe recession may deepen and continue in future periods.**PROFITABILITY AND KEY BUSINESS TRENDS >**Comparing fiscal 2009 to fiscal 2008, our revenues decreased by 9.7% to $130.5 million, ouroperating profit decreased by 43.3% to $17.4 million and our net income decreased by 44.3% to $11.8million. Our rental and lease revenues decreased in our T&M and DP segments, due primarily to lowerdemand for leases, and a decline in rental activity and rental rates due to the global recessionand competitive pressures. Revenue also decreased in our foreign operations, with the exception ofour European operations, which grew during fiscal 2009.Some of our key profitability measurements are presented below:               Fiscal 2009  Fiscal 2008  Fiscal 2007  NET INCOME PER DILUTED COMMON SHARE (EPS) $0.47  $0.81  $0.81 NET INCOME AS A PERCENTAGE OF AVERAGEASSETS  4.2%  7.3%  7.7%NET INCOME AS A PERCENTAGE OF AVERAGEEQUITY  4.9%  8.6%  9.2% The decrease in our operating profit primarily reflects competitive pressures on rental rates andlower equipment utilization rates. In addition, our selling, general and administrative expenseshave increased due to foreign currency losses of $0.6 million for fiscal 2009, compared to aforeign currency gain of $0.4 million for fiscal 2008, as a result of a strengthening of the U.S.dollar against key currencies.The amount of our equipment on rent, based on acquisition cost, decreased 6.5% to $147.3 million atMay 31, 2009 from $157.5 million at May 31, 2008. Acquisition cost of equipment on lease decreased20.7% to $27.9 million at May 31, 2009 from $35.3 million at May 31, 2008. Average rental and leaserates for our T&M and DP segments declined by 11.5% and 3.6%, respectively, from May 31, 2008 toMay 31, 2009. Utilization for our T&M equipment pool, based on acquisition cost of equipment onrent and lease compared to the total pool, was 55.8% at May 31, 2009, compared to 61.7% at May 31,2008. Over the same period, utilization of our DP equipment pool decreased to 42.5% from 55.4%.**RESULTS OF OPERATIONS >**Fiscal 2009 Compared with Fiscal 2008*Total Revenues:*Total revenues for fiscal 2009 decreased $14.0 million, or 9.7%, to $130.5 million,compared to $144.5 million for fiscal 2008. The decrease in total revenues was due to a 9.5%decrease in rental and lease revenues and a 10.3% decrease in sales of equipment and otherrevenues.Rental and lease revenues in fiscal 2009 were $98.4 million, compared to $108.8 million in fiscal2008. This reflected a decline in our T&M and DP lease revenues, primarily due to lower demand, anda decrease in T&M and DP rental revenues, reflecting decreased rental activity and rental rates dueto competitive pressures and the global recession.Sales of equipment and other revenues decreased to $32.1 million in fiscal 2009 from $35.8 millionin fiscal 2008. Our used equipment sales have declined, reflecting lower customer demand. However,this decline has been partly offset by an increase in distribution sales and increased financelease activity. This increase is due to the
 

 
ELECTRO RENT 2009 ANNUAL REPORT     7continued development, both in terms of personnel and marketing, of our distribution channel andour vendor leasing program that provides customers with flexible financing alternatives.*Depreciation of Rental and Lease Equipment:*Depreciation of rental and lease equipment increased infiscal 2009 to $46.1 million, or 46.8% of rental and lease revenues, from $45.0 million, or 41.4%of rental and lease revenues, in fiscal 2008. The increased depreciation expense in fiscal 2009 wasdue to a higher average rental and lease equipment pool, while the increased depreciation ratio, asa percentage of rental and lease revenues, was due primarily to a decline in our rental and leaserevenues, reflecting lower rental rates and lower demand for leases, as well as lower utilizationrates.*Costs of Revenues Other Than Depreciation:*Costs of revenues other than depreciation decreased 9.4%to $22.6 million in fiscal 2009 from $24.9 million in fiscal 2008. Costs of revenues other thandepreciation primarily includes the cost of equipment sales, which increased as a percentage ofequipment sales to 67.3% in fiscal 2009 from 65.2% in fiscal 2008. This increase reflected a decline in our higher-margin used equipment salesdue to lower customer demand, reflecting competitive pressures and the global recession, andincreased finance leases and distribution sales, which carry a lower margin. Our cost of revenuesother than depreciation decreased primarily due to a decline in our used equipment sales. Based onour current equipment management strategy, we anticipate that future gross margin on sales willtrend downward as lower-margin finance leases and distribution sales continue to represent anincreased portion of our equipment sales, although the gross margin percentage will fluctuate on aquarterly basis, depending primarily on customer requirements and funding and growth in ourdistribution channel and finance leases.*Selling, General and Administrative Expenses:*Selling, general and administrative expensesincreased 1.2% to $44.5 million in fiscal 2009, compared to $43.9 million in fiscal 2008. Selling,general and administrative expenses as a percentage of total revenues increased to 34.1% in fiscal2009 from 30.4% in fiscal 2008, due in part to a decline in revenue. Our selling, general andadministrative expenses increased due to a foreign currency loss of $0.6 million for fiscal 2009,compared to a foreign currency gain of $0.4 million for fiscal 2008, as a result of a strengtheningof the U.S. dollar against key currencies. Excluding foreign currency effects, our selling, generaland administrative expenses have decreased due to a decline in personnel and benefit related costs.*Operating Profit:*As a result of the decrease in revenues and increase in selling, general andadministrative expenses, operating profit decreased 43.3% to $17.4 million, or 13.3% of totalrevenues, in fiscal 2009, compared to an operating profit of $30.7 million, or 21.2% of totalrevenues, in fiscal 2008.*Interest Income, Net:*Interest income, net, was $1.5 million in fiscal 2009, compared to $3.3million in fiscal 2008. The decrease reflected decreases in prevailing interest rates and a lowercash balance. Interest income, net, for fiscal 2009 included $1.6 million of unrealized gains onour put option. In addition, interest income, net, for fiscal 2009 included $1.6 million ofunrealized losses on our investments, trading. There were no such amounts for fiscal 2008.*Income Tax Provision:*Our effective tax rate decreased slightly to 37.8% for fiscal 2009, comparedto 37.9% for fiscal 2008. Although fiscal 2009 included a release of reserves as a result ofchanges in estimated tax exposures, this was partially offset by a valuation allowance relating tocertain deferred tax assets of our foreign operations.Fiscal 2008 Compared with Fiscal 2007*Total Revenues:*Total revenues for fiscal 2008 rose $17.6 million, or 13.9%, to $144.5 million,compared to $126.9 million for fiscal 2007. The increase in total revenues was due to an overall5.5% increase in T&M and DP rental and lease revenues, and a 50.5% increase in sales of equipmentand other revenues.Rental and lease revenues in fiscal 2008 were $108.8 million, compared to $103.1 million in fiscal2007. This increase was the result of growth in our foreign operations and higher demand for T&Mequipment in our major markets, including aerospace and defense, telecommunications andelectronics. The effect of higher demand for T&M equipment was partially offset by lower rentalrates we charged in fiscal 2008 related to increased competition.
 

 
8       ELECTRO RENT 2009 ANNUAL REPORTSales of equipment and other revenues increased to $35.8 million in fiscal 2008 from $23.8 millionin fiscal 2007. This increase is due in part to growth in our distribution sales and a large buyout by acustomer of used equipment in the fourth quarter of fiscal 2008. The increase in distribution salesis due to the development, both in terms of personnel and marketing, of our distribution channel.*Depreciation of Rental and Lease Equipment:*Depreciation of rental and lease equipment in fiscal2008 increased to $45.0 million, or 41.4% of rental and lease revenues, from $42.2 million, or40.9% of rental and lease revenues, in fiscal 2007. Fiscal 2007 included an equipment impairmentcharge of $0.4 million. The increased depreciation expense in fiscal 2008 was due to a higheraverage rental and lease equipment pool, while the increased depreciation ratio for fiscal 2008 wasdue primarily to lower rental rates and utilization.*Costs of Revenues Other Than Depreciation:*Costs of revenues other than depreciation in fiscal 2008increased 82.2% to $24.9 million from $13.7 million in fiscal 2007. Costs of revenues other thandepreciation primarily includes the cost of equipment sales, which increased as a percentage ofequipment sales to 65.2% in fiscal 2008 from 52.7% in fiscal 2007, reflecting increased distribution sales, which carry a lower margin, as wellas a lower margin in the large buyout. As noted above, our costs of revenues other thandepreciation increased primarily due to an increase in our distribution sales and the large buyout.*Selling, General and Administrative Expenses:*Selling, general and administrative expensesincreased 4.6% to $43.9 million in fiscal 2008, compared to $42.0 million in fiscal 2007. Selling,general and administrative expenses as a percentage of total revenues decreased to 30.4% in fiscal2008 from 33.1% in fiscal 2007. Our selling, general and administrative expenses increased due tohigher personnel and benefit costs to support our additional revenues. Selling, general andadministrative expenses included $0.2 million of stock compensation expense for fiscal 2008,compared to $0.9 million for fiscal 2007.*Operating Profit:*As a result of the increase in revenues, partly offset by the related increase inoperating expenses discussed above, operating profit increased 5.8% to $30.7 million, or 21.2% oftotal revenues, in fiscal 2008, compared to an operating profit of $29.0 million, or 22.9% of totalrevenues, in fiscal 2007.*Interest Income, Net:*Interest income, net, was $3.3 million in fiscal 2008, compared to $3.9million in fiscal 2007. This decrease primarily reflected decreases in prevailing money-marketinterest rates and a lower cash balance.*Income from Settlements:*In the third quarter of fiscal 2007, when all contingencies expired, werecognized $1.6 million in other income relating to proceeds received from a class action lawsuit.There was no comparable income in fiscal 2008.*Income Tax Provision:*Our effective tax rate was 37.9% for fiscal 2008, compared to 38.9% forfiscal 2007. The decrease was due primarily to the utilization of tax loss carryforwards for ourEuropean subsidiary, and lower tax rates on earnings from our foreign subsidiaries.**LIQUIDITY AND CAPITAL RESOURCES >**Capital Expenditures. During the last three fiscal years, our primary capital requirements havebeen purchases of rental and lease equipment. We generally purchase equipment throughout each yearto replace equipment that has been sold and to maintain adequate levels of rental equipment to meetexisting and expected customer demands. To meet T&M rental demand, support areas of potentialgrowth for both T&M and DP equipment and to keep our equipment pool technologically up-to-date, wemade payments for purchases of $52.0 million of rental and lease equipment during fiscal 2009,$81.0 million in fiscal 2008, and $74.9 million in fiscal 2007. In response to reduced customerdemand in the current economic conditions, fiscal 2009 purchases were 35.8% lower than fiscal 2008.Share Repurchases and Dividends. We periodically repurchase shares of our common stock under anauthorization from our board of directors. Shares we repurchase are retired and returned to thestatus of authorized but unissued stock. During fiscal 2009, 2008 and 2007, we repurchased2,138,057, 11,740 and 224,600 shares of our common stock, respectively, for $22.8 million, $0.2million and $3.0 million, respectively, at an average price per share of
 

 
ELECTRO RENT 2009 ANNUAL REPORT     9$10.67, $12.96 and $13.19, respectively. We may make repurchases of our common stock in the futurethrough open market transactions or otherwise, but we have no commitments to do so.In April 2007, our board of directors authorized a regular quarterly cash dividend of $0.10 percommon share, or $0.40 per annum. We commenced payment of our quarterly cash dividend in July 2007.In January 2008, our board of directors approved an increase of the quarterly dividend to $0.15 percommon share, or $0.60 per annum. For fiscal 2009 and 2008, we paid aggregate dividends of $15.0million and $11.7 million, respectively. There was no dividend paid in fiscal 2007. We expect to continue paying a quarterly dividend infuture quarters, although the amount and timing of dividends, if any, will be made at thediscretion of our board of directors in each quarter, subject to compliance with applicable law.Dividend and Repurchase Summary                       Fiscal Year Ended May 31,   Three Year          (in thousands, except per share information) Totals  2009  2008  2007  CASH DIVIDENDS PAID $26,689  $15,030  $11,659  $— SHARES REPURCHASED  2,375   2,138   12   225 AVERAGE PRICE PER SHARE REPURCHASED $10.92  $10.67  $12.96  $13.19 AGGREGATE REPURCHASE PRICE $25,927  $22,813  $152  $2,962 TOTAL CASH RETURNED TO SHAREHOLDERS $52,616  $37,843  $11,811  $2,962  Cash and Cash Equivalents and Investments. Despite the $52.6 million in cash we have returned toour shareholders, the total of our cash and cash equivalents and investments has remainedrelatively stable over our past three fiscal years. We expect that the level of our cash and cashequivalents and investments may decrease as we pay dividends in future quarters, or decide to buyback additional shares of our common stock, increase equipment purchases in response to demand,finance another acquisition, or pursue other opportunities. We have invested our cash balance inmoney market funds, corporate and government bond funds, and auction rate securities (“ARS”).At May 31, 2009, we held $21.6 million, at cost, of ARS, which we classify as investments, trading.The fair value of our ARS at May 31, 2009 was $20.0 million. Our ARS are long-term debt instrumentsbacked by student loans, a substantial portion of which are guaranteed by the United Statesgovernment. Although our ARS became illiquid beginning in February 2008, we continue to earn andreceive interest on our ARS at a predetermined formula with spreads tied toparticular interest rate indexes. We value the ARS from quotes received from our broker, UBS AG(“UBS”), which are derived from UBS’s internally developed model. In determining a discount factorfor each ARS, the model weights various factors, including assessments of credit quality, duration,insurance wraps, portfolio composition, discount rates, overall capital market liquidity andcomparable securities, if any.We have entered into an arrangement with UBS under which we can require UBS to purchase our ARS atpar value, which is defined as the price equal to the liquidation preference of the ARS plusaccrued but unpaid dividends or interest, at any time between June 30, 2010 and July 2, 2012.Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time untilJuly 2, 2012, so long as we receive a payment at par value upon any sale or disposition. We expectto sell our ARS under our agreement with UBS. In addition, UBS Bank USA has established a creditline for us in an amount up to 75% of the market value of the ARS that we pledge as collateral,with interest equal to the interest income that we receive on our ARS investments. We have notdrawn any amounts under this line and have no current plans to do so.Given the approximately $50.4 million of cash and cash equivalents and investmentsavailable-for-sale that we held as of May 31, 2009 (primarily U.S. Treasury money market funds andcorporate and government bond funds), and our lack of bank debt as of that date, we expect to beable to continue to finance our operations even if our ARS were to be illiquid for an extendedperiod of time.Cash Flows and Credit Facilities. The acquisition cost of our rental and lease equipment portfolioat May 31, 2009 totaled $337.6 million, an increase of $3.9 million from the prior fiscal year end.During the past two fiscal years,
 

 
10       ELECTRO RENT 2009 ANNUAL REPORTwe made payments for equipment purchases totaling $132.9 million, and recorded an aggregateincrease in the acquisition cost of our equipment portfolio, net of the liquidation of usedequipment, of $35.6 million. We have three principal sources of liquidity: cash flows provided byour operating activities, proceeds from the sale of equipment from our portfolio, and externalfunds that historically have been provided by bank borrowings.During fiscal 2009 and 2008, net cash provided by operating activities was $59.0 million and $54.2million, respectively. The increase in operating cash flow from fiscal 2009 was due primarily to: a$6.2 million decrease in accounts receivable for fiscal 2009, compared to an increase of $6.0million for fiscal 2008; an increase in deferred tax liability of $4.6 million for fiscal 2009,compared to an increase of $0.5 million for fiscal 2008; and a remeasurement loss of $0.4 millionfor fiscal 2009 compared to a gain of $0.4 million for fiscal 2008. This increase was offset by adecline in net income for fiscal 2009 to $11.8 million compared to $21.1 million in fiscal 2008.During fiscal 2009 and 2008, net cash used in investing activities was $50.8 million and $50.3million, respectively. Fiscal 2009 includes a decrease in payments for the purchase of rental andlease equipment to $52.0 million, compared to $81.0 million for fiscal 2008. This decrease wasoffset by an increase in purchases of investments to $27.9 million for fiscal 2009 compared to $3.5million for fiscal 2008.Net cash flows used in financing activities was $36.5 million and $10.3 million in fiscal 2009 and2008, respectively. Fiscal 2009 includes an increase in dividend payments to shareholders to $15.0million for fiscal 2009, compared to $11.7 for fiscal 2008, and an increase in payments forrepurchase of common stock to $22.8 million for fiscal 2009, compared to $0.2 million for fiscal2008. In addition, proceeds from the issuance of common stock declined to $1.3 million for fiscal2009, compared to $1.4 million for fiscal 2008.As the following table illustrates, aggregate cash flows from operating activities and proceedsfrom the sale of equipment have been more than sufficient to fund our operations during the lasttwo fiscal years.               Two Years Ended       (in thousands) May 31, 2009  2009  2008  CASH FLOWS FROM OPERATING ACTIVITIES1 $113,155  $58,977  $54,178 PROCEEDS FROM SALE OF EQUIPMENT  58,479   27,342   31,137  TOTAL  171,634   86,319   85,315 PAYMENTS FOR EQUIPMENT PURCHASES  (132,931)  (51,956)  (80,975)NET INCREASE IN EQUIPMENT PORTFOLIO ATACQUISITION COST  35,600   3,915   31,685   1 For the components of cash flows from operating activities see the consolidatedstatements of cash flows.As indicated by the table, cash flows from operating activities and proceeds from sale of equipmentprovided 129% of the funds required for equipment purchased during the past two fiscal years.We have a $10.0 million revolving line of credit with an institutional lender, subject to certainrestrictions, to meet equipment acquisition needs as well as working capital and general corporaterequirements. We had no bank borrowings outstanding or off balance sheet financing arrangementsduring the last two fiscal years.We believe that cash and cash equivalents, investments available-for-sale, cash flows fromoperating activities, proceeds from the sale of equipment and our borrowing capacity will besufficient to fund our operations for at least the next twelve months.Inflation. Inflation generally has favorably influenced our results of operations by enhancing thesale prices of our used equipment. However, lower inflation rates and the continued availability ofnewer, less expensive equipment with similar or better specifications over a period of severalyears could result in lower relative sale prices for used electronic equipment. If this shouldoccur, our margins and earnings will be reduced. Prices of new and used electronic test equipmenthave not consistently followed the overall inflation rate, while prices of new and used personalcomputers and servers have consistently declined. Because we are unable to predict the advances intechnology and the rate of inflation for the next several years, it is not possible to estimate theimpact of these factors on our margins and earnings.
 

 
ELECTRO RENT 2009 ANNUAL REPORT     11**CONTRACTUAL OBLIGATIONS >**We lease certain facilities under various operating leases. Most of the lease agreements provide uswith the option of renewing the lease at the end of the initial lease term, at the fair rentalvalue, for periods of up to five years.In most cases, we expect that facility leases will be renewed or replaced by other leases in thenormal course of business.The table below presents the amount of payments due under our contractual obligations. The tablereflects expected payments due as of May 31, 2009 and does not reflect changes that could ariseafter that time.                           Payments due by period       Less than    More than Contractual Obligations (in thousands) Total  1 year  1-3 years  3-5 years  5 years  FACILITY LEASE PAYMENTS, NOT INCLUDINGPROPERTY TAXES AND INSURANCE $1,631  $721  $795  $92  $23  TOTAL $1,631  $721  $795  $92  $23  The exact timing of reversal or settlement of our FIN 48 liabilities of $5.8 million could not bereasonably estimated at the end of the current fiscal year.**CRITICAL ACCOUNTING POLICIES AND ESTIMATES >**The preparation of consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosure of contingent assetsand liabilities at the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. On a regular basis, we review these estimates, includingthose related to asset lives and depreciation methods, impairment of long-lived assets (includingrental and lease equipment), investments, allowance for doubtful accounts and income taxes. Theseestimates are based on our historical experience and on various other assumptions we believe to bereasonable under the circumstances. Actual results may differ from these estimates under differentassumptions or conditions.We believe the following critical accounting policies affect the more significant judgments andestimates used in the preparation of our financial statements:*Asset Lives and Depreciation Methods:*Our primary business involves the purchase and subsequentrental and lease of long-lived electronic equipment. We have chosen asset lives that we believecorrespond to the economic lives of the related assets. We have chosen depreciation methods that webelieve generally match our benefit from the assets with the associated costs. These judgments havebeen made based on our expertise in each equipment type that we carry. If the asset life anddepreciation method chosen do not reduce the book value of the asset to at least our potentialfuture cash flows from the asset, we would be required to record an impairment loss. Depreciationmethods and useful lives are periodically reviewed and revised as deemed appropriate.*Investments in Debt Securities:*Our investment portfolio may at any time contain direct obligationsof the United States government, securities issued by agencies of the United States government,money market or cash management funds, corporate and government bond funds, and auction ratesecurities (“ARS”). Statement of Financial Accounting Standards (“SFAS”) No.157, *Fair Value Measurements*(“SFAS 157”) establishes three levels of inputs that may be used tomeasure fair value (see Note 3 to our consolidated financial statements). Each level of input hasdifferent levels of subjectivity and difficulty in determining fair value.Level 1 — Observable inputs, such as quoted prices in active markets for identical assets orliabilities.Determining fair value for Level 1 investments generally does not require significantmanagement judgment.Level 2 — Inputs, other than the quoted prices in active markets, that are observable eitherdirectly or through corroboration with observable market data.
 

 
12     ELECTRO RENT 2009 ANNUAL REPORTLevel 3 — Unobservable inputs, for which there is little or no market data for the assets orliabilities, such as internally-developed valuation models. The determination of fair value forLevel 3 investments requires the most management judgment and subjectivity.All of the securities classified as Level 3 investments are ARS. At May 31, 2009, we held $21,600,at cost, ofARS. During fiscal 2009, we sold $2,000 of our ARS at par value. Our ARS are long-term debtinstruments backed by student loans, a substantial portion of which are guaranteed by the UnitedStates government.Although our ARS became illiquid beginning in February 2008, we continue to earn and receiveinterest on ourARS at a pre-determined formula with spreads tied to particular interest rate indexes. We value theARS from quotes received from our broker, UBS, which are derived from UBS’s internally developedmodel. In determining a discount factor for each ARS, the model weights various factors, includingassessments of credit quality, duration, insurance wraps, portfolio composition, discount rates,overall capital market liquidity and comparable securities, if any.We have entered into an arrangement (the “Rights”) with UBS under which we can require UBS topurchase ourARS at par value, which is defined as the price equal to the liquidation preference of the ARS plusaccrued but unpaid dividends or interest, at any time between June 30, 2010 and July 2, 2012.Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time untilJuly 2, 2012, so long as we receive a payment at par value upon any sale or disposition. We expectto sell our ARS under the Rights. In addition, UBS Bank USA has established a credit line for us inan amount up to 75% of the market value of the ARS that we pledge as collateral, with interestequal to the interest income that we receive on our ARS investments. We have not drawn any amountsunder this line and have no current plans to do so. UBS’s obligations under the Rights are notsecured by its assets and do not require UBS to obtain any financing to support its performanceobligations under the Rights. UBS has disclaimed any assurance that it will have sufficientfinancial resources to satisfy its obligations under the Rights.*Impairment of Long-Lived Assets:*On a quarterly basis, we review the carrying value of our rentaland lease equipment to determine if the carrying value of the assets may not be recoverable due tocurrent and forecasted economic conditions. This requires us to make estimates related to futurecash flows from the assets and to determine whether any deterioration is other than temporary. Ifthese estimates or the related assumptions change in the future, we may be required to recordadditional impairment charges. In the third quarter of fiscal 2007, we recorded a non-cashimpairment charge of $0.4 million, resulting from low projected demand for certain rental products,including general purpose and communications test equipment. No similar impairment charge wasrecorded in fiscal 2009 or 2008.*Allowance for Doubtful Accounts:*We maintain an allowance for doubtful accounts for estimatedlosses resulting from the inability of customers to pay our invoices. The estimated losses arebased on historical collection experience in conjunction with an evaluation of the current statusof the existing accounts. If the financial condition of our customers were to deteriorate, thenadditional allowances could be required that would reduce income. Conversely, if the financialcondition of our customers were to improve or if legal remedies to collect past due amounts weremore successful than expected, then the allowance for doubtful accounts might need to be reducedand income would be increased.*Income Taxes:*As part of the process of preparing our consolidated financial statements, we arerequired to estimate income taxes in each of the jurisdictions in which we operate. Significantjudgment is required in determining the provision for income taxes and deferred tax assets andliabilities. This process involves us estimating actual current tax exposure together withassessing temporary differences resulting from differing treatment of items, such as depreciationand amortization, for tax and accounting purposes. These differences result in deferred tax assetsand liabilities, which are included within our consolidated balance sheet. We then assess thelikelihood that our deferred tax assets will be recovered. To the extent management believes thatrecovery is not likely, we establish a valuation allowance. We determined that a valuationallowance was required in fiscal 2009 and 2007 of $0.3 million and $0.2 million, respectively, forour deferred tax asset related to certain foreign net operating loss carry forwards and otherrelated timing differences. There was no valuation allowance required for fiscal 2008.
 

 
ELECTRO RENT 2009 ANNUAL REPORT     13Effective June 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No.48,*Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109*(“FIN48”). FIN 48 requires that the tax effects of a position be recognized only if it is“more-likely-than-not” to be sustained based solely on its technical merits as of the reportingdate. The more-likely-than-not threshold represents a positive assertion by us that our company isentitled to the economic benefits of a tax position. If a tax position is not consideredmore-likely-than-not to be sustained based solely on its technical merits, no benefits of theposition are to be recognized. Moreover, the more-likely-than-not threshold must continue to be metin each reporting period to support continued recognition of a benefit. At adoption, companies mustadjust their financial statements to reflect only those tax positions that are more-likely-than-notto be sustained as of the adoption date. Any necessary adjustment would be recorded directly toretained earnings in the period of adoption and reported as a change in accounting principle.Pursuant to our adoption of FIN 48 on June 1, 2007, we recorded a net decrease of $0.4 million toretained earnings.**SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS >**This Report contains forward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Youcan find many (but not all) of these statements by looking for words such as “approximates,”“believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or othersimilar expressions in this Report. We claim the protection of the safe harbor contained in thePrivate Securities Litigation Reform Act of 1995. We caution investors that any forward-lookingstatements presented in this Report, or those that we may make orally or in writing from time totime, are based on the beliefs of, assumptions made by, and information currently available to us.Such statements are based on assumptions and the actual outcome will be affected by known andunknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.Although we believe that our assumptions are reasonable, they are not guarantees of futureperformance, and some will inevitably prove to be incorrect. As a result, our actual future resultscan be expected to differ from our expectations, and those differences may be material.Accordingly, investors should use caution in relying on past forward-looking statements, which arebased on known results and trends at the time they are made, to anticipate future results ortrends.Some of the risks and uncertainties that may cause our actual results, performance or achievementsto differ materially from those expressed or implied by forward-looking statements include thefollowing: common stock price fluctuations, fluctuations in operating results (including as aresult of changing economic conditions), risks associated with investments, risks associated withtechnology changes, risks associated with customer solvency, competition, risks associated withinternational operations, risks associated with our manufacturers and suppliers, dependence on keypersonnel, control by management and others, risks associated with possible acquisitions and newbusiness ventures, risks associated with fluctuating interest rates and anti-takeover provisions.For further discussion of these and other factors, see the sections contained in this annual reportentitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;Item 1A “Risk Factors” and Item 7A “Quantitative and Qualitative Disclosure About Interest Ratesand Currency Rates,” in our 2009 Annual Report on Form 10-K; and our other filings with theSecurities and Exchange Commission.This annual report and all subsequent written and oral forward-looking statements attributable tous or any person acting on our behalf are expressly qualified in their entirety by the cautionarystatements contained or referred to in this section. We do not undertake any obligation to releasepublicly any revisions to our forward-looking statements to reflect events or circumstances afterthe date of this annual report.
 

 
14     ELECTRO RENT 2009 ANNUAL REPORTCONSOLIDATED STATEMENTS OF OPERATIONS              Year Ended May 31,          (in thousands, except per share information) 2009   2008  2007     **REVENUES:**             RENTALS AND LEASES $98,395   $108,761  $103,083 SALES OF EQUIPMENT AND OTHER REVENUES  32,086    35,775   23,776     TOTAL REVENUES  130,481    144,536   126,859                   **OPERATING EXPENSES:**             DEPRECIATION OF RENTAL AND LEASE EQUIPMENT  46,056    44,987   42,174 COSTS OF REVENUES OTHER THAN DEPRECIATIONOF RENTAL AND LEASE EQUIPMENT  22,574    24,914   13,674 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES  44,456    43,940   42,000     TOTAL OPERATING EXPENSES  113,086    113,841   97,848     OPERATING PROFIT  17,395    30,695   29,011 INTEREST INCOME, NET  1,507    3,292   3,869 INCOME FROM SETTLEMENT  —    —   1,571     INCOME BEFORE INCOME TAXES  18,902    33,987   34,451 INCOME TAX PROVISION  7,150    12,883   13,402     NET INCOME $11,752   $21,104  $21,049                   EARNINGS PER SHARE:             BASIC $0.47   $0.81  $0.82 DILUTED $0.47   $0.81  $0.81 SHARES USED IN PER SHARE CALCULATION:             BASIC  24,899    25,910   25,716 DILUTED  24,980    26,079   26,053     The accompanying notes are an integral part of these consolidated financial statements.
 

 
ELECTRO RENT 2009 ANNUAL REPORT     15CONSOLIDATED BALANCE SHEETS          As of May 31,       (in thousands, except share information) 2009   2008     **ASSETS**         CASH AND CASH EQUIVALENTS $22,215   $50,964 INVESTMENTS AVAILABLE-FOR-SALE, AT FAIR VALUE (COST OF$27,896 AND $23,600)  28,188    22,601 INVESTMENTS, TRADING, AT FAIR VALUE (COST OF $21,600)  19,977    — PUT OPTION  1,623    — ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTSOF $317 AND $359 16,271    23,128 RENTAL AND LEASE EQUIPMENT, NET OF ACCUMULATED DEPRECIATIONOF $179,318 AND $161,187 158,252    172,468 OTHER PROPERTY, NET OF ACCUMULATED DEPRECIATION ANDAMORTIZATION OF $15,207 AND $14,427 13,781    14,341 GOODWILL  3,109    3,109 INTANGIBLES, NET OF AMORTIZATION OF $1,741 AND $1,406  734    1,069 OTHER  7,184    5,402       $271,334   $293,082               **LIABILITIES AND SHAREHOLDERS’ EQUITY**         LIABILITIES:         ACCOUNTS PAYABLE $3,291   $4,562 ACCRUED EXPENSES  15,023    12,565 DEFERRED REVENUE  4,281    4,943 DEFERRED TAX LIABILITY  19,986    14,904     TOTAL LIABILITIES  42,581    36,974     COMMITMENTS AND CONTINGENCIES (NOTE 13)         SHAREHOLDERS’ EQUITY:         PREFERRED STOCK, $1 PAR — SHARES AUTHORIZED 1,000,000; NONEISSUED         COMMON STOCK, NO PAR — SHARES AUTHORIZED 40,000,000;ISSUED AND OUTSTANDING 2009 — 23,953,540; 2008 — 25,945,283  32,596    33,938 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX  176    (619)RETAINED EARNINGS  195,981    222,789     TOTAL SHAREHOLDERS’ EQUITY  228,753    256,108       $271,334   $293,082     The accompanying notes are an integral part of these consolidated financial statements.
 

 
16      ELECTRO RENT 2009 ANNUAL REPORTCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY                               Accumulated          Common Stock  Other      Total Three years ended May 31, 2009 Number      Comprehensive  Retained  Shareholders’ (in thousands) of Shares  Amount  Income/(Loss)  Earnings  Equity  BALANCE, JUNE 1, 2006  25,547  $26,351  $—  $195,490  $221,841 EXERCISE OF STOCK OPTIONS  491   4,339   —   —   4,339 TAX BENEFIT FOR STOCKOPTIONS EXERCISED —   942   —   —   942 NON-CASH STOCK COMPENSATION  —   850   —   —   850 REPURCHASE OF COMMON STOCK  (225)  (270)  —   (2,692)  (2,962)DIVIDENDS DECLARED  —   —   —   (2,580)  (2,580)NET INCOME FOR THE YEARENDED MAY 31, 2007  —   —   —   21,049   21,049                       BALANCE, MAY 31, 2007  25,813   32,212   —   211,267   243,479 EXERCISE OF STOCK OPTIONSAND ISSUANCE OFRESTRICTED SHARES  144   1,366   —   —   1,366 TAX BENEFIT FOR STOCKOPTIONS EXERCISED —   175   —   —   175 NON-CASH STOCK COMPENSATION  —   200   —   —   200 REPURCHASE OF COMMON STOCK  (12)  (15)  —   (137)  (152)DIVIDENDS DECLARED  —   —   —   (9,079)  (9,079)CUMULATIVE EFFECT OFADOPTION OF FIN 48 —   —   —   (366)  (366)COMPREHENSIVE INCOME:                    UNREALIZED LOSSES ONINVESTMENTSAVAILABLE-FOR-SALE,NET OF $380 OF TAXBENEFIT  —   —   (619)  —   (619)NET INCOME FOR THEYEAR ENDED MAY 31,2008  —   —   —   21,104   21,104                      TOTAL COMPREHENSIVEINCOME                  20,485                       BALANCE, MAY 31, 2008  25,945   33,938   (619)  222,789   256,108 EXERCISE OF STOCK OPTIONSAND ISSUANCE OFRESTRICTED SHARES  147   1,327   —   —   1,327 TAX BENEFIT FOR STOCKOPTIONS EXERCISED  —   49   —   —   49 NON-CASH STOCKCOMPENSATION EXPENSE  —   158   —   —   158 REPURCHASE OF COMMON STOCK  (2,138)  (2,876)  —   (19,937)  (22,813)DIVIDENDS DECLARED  —   —   —   (18,623)  (18,623)COMPREHENSIVE INCOME:                  — REALIZED LOSS ONTRANSFER OFINVESTMENTSAVAILABLE-FOR-SALETO INVESTMENTS,TRADING  —   —   619   —   619 UNREALIZED GAINS ONINVESTMENTSAVAILABLE-FOR-SALE,NET OF $116 OF TAXEXPENSE  —   —   176   —   176 NET INCOME FOR THEYEAR ENDED MAY 31,2009 —   —   —   11,752   11,752                      TOTAL COMPREHENSIVEINCOME                  12,547                       BALANCE, MAY 31, 2009  23,954  $32,596  $176  $195,981  $228,753  The accompanying notes are an integral part of these consolidated financial statements.
 

 
ELECTRO RENT 2009 ANNUAL REPORT     17CONSOLIDATED STATEMENTS OF CASH FLOWS              Year Ended May 31,          (in thousands) 2009   2008  2007     **CASH FLOWS FROM OPERATING ACTIVITIES:**             NET INCOME $11,752   $21,104  $21,049 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BYOPERATING ACTIVITIES:             DEPRECIATION AND AMORTIZATION  47,226    46,535   43,381 PUT OPTION GAIN  (1,623)   —   — UNREALIZED HOLDING LOSSES FOR TRADING SECURITIES  1,623    —   — REMEASUREMENT LOSS (GAIN)  445    (440)  (150)GAIN ON SALE OF RENTAL AND LEASE EQUIPMENT  (8,952)   (10,830)  (8,891)IMPAIRMENT LOSS ON RENTAL EQUIPMENT  —    —   440 DEFERRED TAX LIABILITY  4,588    530   591 STOCK COMPENSATION EXPENSE  158    200   850 PROVISION (RECAPTURE) FOR LOSSES ON ACCOUNTS RECEIVABLE  481    425   (231)EXCESS TAX BENEFIT FOR STOCK OPTIONS EXERCISED  (49)   (175)  (942)CHANGES IN OPERATING ASSETS AND LIABILITIES:             ACCOUNTS RECEIVABLE  6,170    (5,995)  (1,586)OTHER ASSETS  (1,779)   312   (1,371)ACCOUNTS PAYABLE  508    (539)  (709)ACCRUED EXPENSES  (945)   3,186   764 DEFERRED REVENUE  (626)   (135)  485     NET CASH PROVIDED BY OPERATING ACTIVITIES  58,977    54,178   53,680                   **CASH FLOWS FROM INVESTING ACTIVITIES:**             PROCEEDS FROM SALE OF RENTAL AND LEASE EQUIPMENT  27,342    31,137   18,786 CASH PAID FOR ACQUISITION, NET OF CASH ACQUIRED  —    —   (257)PAYMENTS FOR PURCHASE OF RENTAL AND LEASE EQUIPMENT  (51,956)   (80,975)  (74,894)PAYMENTS FOR PURCHASE OF INVESTMENTS  (27,896)   (3,500)  (800)REDEMPTIONS OF INVESTMENTS  2,000    3,450   — PAYMENTS FOR PURCHASE OF OTHER PROPERTY  (275)   (398)  (498)    NET CASH USED IN INVESTING ACTIVITIES  (50,785)   (50,286)  (57,663)                  **CASH FLOWS FROM FINANCING ACTIVITIES:**             EXCESS TAX BENEFIT FOR STOCK OPTIONS EXERCISED  49    175   942 PROCEEDS FROM ISSUANCE OF COMMON STOCK  1,327    1,366   4,339 PAYMENTS FOR REPURCHASE OF COMMON STOCK  (22,813)   (152)  (2,962)PAYMENT OF DIVIDENDS  (15,030)   (11,659)  —     NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES  (36,467)   (10,270)  2,319     NET DECREASE IN CASH AND CASH EQUIVALENTS  (28,275)   (6,378)  (1,664)EFFECT OF EXCHANGE RATE CHANGES ON CASH  (474)   170   88 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR  50,964    57,172   58,748     CASH AND CASH EQUIVALENTS AT END OF YEAR $22,215   $50,964  $57,172     The accompanying notes are an integral part of these consolidated financial statements.
 

 
18     ELECTRO RENT 2009 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MAY 31, 2009, 2008 AND 2007